Carers Allowance - Pension or Isa

ElizabethDarcy

Hello

I am not working, I have full time carers duties (some would say more than full time working ...)

I would like to put some of my allowance away towards my pension

I have a NEST account with nearly 5k in.. 

I am considering moving it to Vanguard and choosing one of their funds,  but also Hargreaves and Landsdowne as an option to invest how I like, I think the NEST funds are limiting..

My question is this: 

It is wise to continue paying into the pension as I get tax back now or would it make more sense to start a stocks and shares isa, with no tax back but tax free when you take the money out.

I appreciate it is obviously my choice but others thoughts would be welcome..

Tax gain now or tax free later... what would you do?  Does it make any difference

I ask because I read somewhere recently that the person who wrote the article "wouldn't choose a pension if they are not employed and there are employer contributions to help along"

They would go for the ISA instead.. I think for the access point of view.

I am 58 so access is not an issue...

I get the "free money from the government" idea but being taxed later is just removing the benefit later on isn't it......or am not looking at this clearly?


Mrs Darcy

Dazed_and_C0nfused

Do you expect to already be paying in the years you withdraw funds from the pension you are thinking of contributing to?

Even if you are it is usually a 6.25% benefit going for the pension as you get tax relief added to your contribution now but only pay 20% tax on 75% of it because of the TFLS.

For example you pay £2,000 and has 25% added to give you a pension fund of £2,500.

Ignoring investment return and charges you then take out the £2,500.  £625 is TFLS and you have £1,875 pension income which is £1,500 after basic rate tax.

So you handed over £2,000 and get £2,125 back.  Or more if you can take the money in tax years when 20% won't be payable on it.

Put £2,000 in an ISA and you only get £2,000 back.

ElizabethDarcy

Dazed_and_C0nfused said:

Do you expect to already be paying in the years you withdraw funds from the pension you are thinking of contributing to?

Even if you are it is usually a 6.25% benefit going for the pension as you get tax relief added to your contribution now but only pay 20% tax on 75% of it because of the TFLS.

For example you pay £2,000 and has 25% added to give you a pension fund of £2,500.

Ignoring investment return and charges you then take out the £2,500.  £625 is TFLS and you have £1,875 pension income which is £1,500 after basic rate tax.

So you handed over £2,000 and get £2,125 back.  Or more if you can take the money in tax years when 20% won't be payable on it.

Put £2,000 in an ISA and you only get £2,000 back.

Thanks D & C.. I think I see your point.

Pension trumps ISA because the government money makes it add up to more..overall

Can I continue to pay in forever and benefit or does the tax free bit stop at at retirement age..

I was thinking of drawing down at pension age but still adding to the funds

I need to go and learn a bit more about this I think...

Albermarle

You can add funds until your are 75 I think .

The main restriction for non earners is that the max you can add is £2880 per tax year and £720 will be added by Nest/Vanguard etc .

NedS

I am assuming you are not currently working, so your only income is your Carers Allowance of approx £3515pa which is taxable income.

So for now you can have both - the best of both worlds, pension and ISA

As a person with no earned income (CA doesn't count as pensionable earned income even though it's taxable), you can pay £3600 gross (you pay £2880 and the government adds £720 to top it up) into a pension. Great, you get the tax relief, or free money from the Government, as you say.

Now withdraw your £3600 from your pension, tax free, and pay it into your ISA. You have an annual tax allowance of £12570, and at the moment you are only using £3515 of that allowance from your Carers Allowance, so you can withdraw (or earn) up to a further £9055 each year tax free. If you anticipate that you will be a tax payer later in retirement, it makes sense to fully utilize your tax free allowance now and get as much out of your pensions as you can tax free. The downside to doing this is that once you've taken even a single penny of taxable income from a pension, you will be limited to paying in no more than £4000pa in the future (called the MPAA), which may be limiting if you wanted to go back into employment and and contribute more than £4000 per year into a pension.

ElizabethDarcy

Thanks NedS... that is a great idea....best of both worlds....:)

Scrounger

NedS said:

If you anticipate that you will be a tax payer later in retirement, it makes sense to fully utilize your tax free allowance now and get as much out of your pensions as you can tax free.

The downside to doing this is that once you've taken even a single penny of taxable income from a pension, you will be limited to paying in no more than £4000pa in the future (called the MPAA), which may be limiting if you wanted to go back into employment and and contribute more than £4000 per year into a pension.

To avoid triggering the MPAA, you can use the 'Small Pots Rule' to withdraw up to £30,000 (in 3 chunks of <=£10k) over 2 or 3 tax years. 

Scrounger

ossian

Scrounger said:

NedS said:

If you anticipate that you will be a tax payer later in retirement, it makes sense to fully utilize your tax free allowance now and get as much out of your pensions as you can tax free.

The downside to doing this is that once you've taken even a single penny of taxable income from a pension, you will be limited to paying in no more than £4000pa in the future (called the MPAA), which may be limiting if you wanted to go back into employment and and contribute more than £4000 per year into a pension.

To avoid triggering the MPAA, you can use the 'Small Pots Rule' to withdraw up to £30,000 (in 3 chunks of <=£10k) over 2 or 3 tax years. 

Scrounger

 Am I right in thinking that the small pot payments are tax free?
Is there any broker than is better than the others for small pots or is it much of a muchness?

Dazed_and_C0nfused

ossian said:

Scrounger said:

NedS said:

If you anticipate that you will be a tax payer later in retirement, it makes sense to fully utilize your tax free allowance now and get as much out of your pensions as you can tax free.

The downside to doing this is that once you've taken even a single penny of taxable income from a pension, you will be limited to paying in no more than £4000pa in the future (called the MPAA), which may be limiting if you wanted to go back into employment and and contribute more than £4000 per year into a pension.

To avoid triggering the MPAA, you can use the 'Small Pots Rule' to withdraw up to £30,000 (in 3 chunks of <=£10k) over 2 or 3 tax years. 

Scrounger

 Am I right in thinking that the small pot payments are tax free?
Is there any broker than is better than the others for small pots or is it much of a muchness?

No, normal rules apply for tax purposes.

Hargreaves Lansdown is often mentioned for splitting larger amounts into 2 or 3 small pots.

MallyGirl

Small pots are still 25% tax free, 75% taxable. They just don't trigger MPAA

Scrounger

ossian said:

Scrounger said:

NedS said:

If you anticipate that you will be a tax payer later in retirement, it makes sense to fully utilize your tax free allowance now and get as much out of your pensions as you can tax free.

The downside to doing this is that once you've taken even a single penny of taxable income from a pension, you will be limited to paying in no more than £4000pa in the future (called the MPAA), which may be limiting if you wanted to go back into employment and and contribute more than £4000 per year into a pension.

To avoid triggering the MPAA, you can use the 'Small Pots Rule' to withdraw up to £30,000 (in 3 chunks of <=£10k) over 2 or 3 tax years. 

Scrounger

Am I right in thinking that the small pot payments are tax free?
Is there any broker than is better than the others for small pots or is it much of a muchness?

As explained above: 25% tax free, 75% taxable (unless, of course, it falls within your personal allowance).

I've only used Fidelity for small pots (mainly because there are no charges ).

Scrounger